The European Union's Action Plan for Innovation is gaining
momentum. Evolving out of concern for increasing European competitiveness, winning new
markets and creating jobs, as highlighted in the Green Paper on Innovation in 1995, this
action plan focuses on a few priority initiatives under the banner "innovation for
growth and employment". In this special edition of I3 UPDATE we summarize the key
points of the EU plan, followed by our commentary and analysis. This analysis is based on
publicly available written material (see Sources), are the authors' opinions and do not
necessarily represent the views of ENTOVATION Network colleagues. We are also aware that
thinking is moving forward in the European Commission, ahead of the public record, and
that our analysis may not be based on latest thinking. Our analysis also reflects a
European level perspective, and does not attempt to review national programmes.

Our main conclusion is that the EU innovation vision is not
bold enough. The knowledge economy is fundamentally changing the nature of innovation and,
despite some laudable plans, we believe that the programme as currently portrayed takes
insufficient account of these changes and needs to be more innovative. Otherwise Europe
will fall behind those other parts of the world which we see as being more in tune with
the commercial exploitation of knowledge.

An Introductory Euro-Primer (useful for our non
European readers)

The grouping of countries, once called the EC or EEC,
European Economic Community is now more frequently called the European Union (EU), though
the word Community is still sometimes used in the central administrative context. The EU
currently comprises 15 nations or Member States - Austria, Belgium, Denmark, Finland,
France, Greece, Germany, Ireland, Italy, Luxembourg, The Netherlands (Holland), Portugal,
Spain, Sweden, United Kingdom. The aim of the EU is to foster mobility of goods and
services, people and finance. The reality is somewhat different with many national and
cultural differences.

Enlargement is planned on a phased basis to include much of
the former Eastern Europe, though countries like Norway and Switzerland remain
uninterested in joining, but nevertheless have many cooperative relationships. The
so-called candidate countries will enter in two waves - Cyprus, Hungary, Poland, Estonia,
the Czech Republic and Slovenia are the first. Bulgaria, Latvia, Lithuania, Romania and
Slovakia will follow. Turkey is also in line for future membership.

The European Commission (often referred to as CEC -
Commission of the European Communities) is the administration. It has 20 Commissioners
supported by 15,000 staff is based mostly in Brussels, though some offices are in
Luxembourg. It is "the guardian of the treaties", initiates proposals for
legislation and carries out the detailed implementation of policies approved by the
European Parliament (that meets monthly in Strasbourg with additional sessions and
committees in Brussels). The Commission is divided into 26 directorates-general (DGs) with
an additional 15 or so specialized services. Each DG is headed by a director-general,
reporting to a Commissioner. Edith Cresson is the Commissioner for science and technology
(DG XII) as well as for education, training and youth (DG XXII) and spearheads the
innovation programme. DG III (Industry) and DG XIII (Telecommunication and Information
Markets) are also closely involved with the programme.

Over 50 per cent of the European Community's budget goes on
agricultural support, although some is allocated to research and development, often on a
50 per cent funding basis to a consortium that must include companies from three member
states. Thus, the Fourth Framework programme (1994-8) allocated 10.7 B ECU, in programmes
that included information and communications technologies, industrial technologies,
environment and energy.

1 ECU (European Currency Unit) is approximately USD
1.2

The currency in the new European Monetary Union (EMU) is
the Euro (which will replace the ECU) . Trading of products and services will start in
Euros in January 1999. It is likely to become overnight the second largest currency traded
after the dollar, and most companies are actively planning its introduction. Even
companies in the UK, which is not among the 11 Euro countries, are likely to start quoting
and invoicing in Euros, since nearly 50 per cent of UK trade is with Euro countries
(Germany heads the UK trade league, just ahead of the USA). Coins and notes will start
circulation in January 2002, and six months later national currencies, such as the German
mark and French franc will be collectors' curiosities.

End of Politics and Economics Lesson!

For further information see the European Union's Web pages:
http://europa.eu.int and make sure by next year your
computer can handle (display/print) the new Euro symbol (a slanting c with two horizontal
lines through the centre).

Europe's Innovation Paradox

In the Foreword to the Innovation Action Plan, Edith
Cresson, the Commissioner responsible for Research, Innovation, Education, Training and
Youth writes:

"In the debate about employment currently sweeping
Europe, it is only rarely that the driving force of innovation is highlighted."

Europe invests considerably in R&D. As a percentage of
GDP it was 1.91 per cent in 1995 compared to 2.45 in the US and 2.95 in Japan. However, it
does not seem to gain commensurate returns. It lags far behind in terms of patents and
other output indicators.

Some other reasons for concern:

Europe's share of GDP devoted to research that is financed
by industry is on average 38 per cent less than that of the USA and 55 per cent less than
Japan.

Development of new products accounts for less than half of
research expenditure in France and Germany, against more than 60 per cent in USA and
Japan.

S and Japan have a trade surplus in high technology goods of
USD 150 billion, Europe's deficit is USD 25 billion.

Measures of competitiveness are not just patents. The
relationship between innovation and prosperity is complex and not fully understood. The
IT/productivity paradox has puzzled economists for years. Multiple variables, the speed of
change and non-linear cause and effect (cf. systems dynamics) make the relationships
difficult to track.

All nations, in industrial and developing countries alike,
are addressing this challenge in one way or anther. The knowledge economy is one of
abundance not scarcity. It creates an opportunity to (re)define the very notion of the
innovation process. Competitiveness is an unfortunate term, since wealth creation in the
knowledge economy will depending on creating viable niches in a global collaborative
infrastructure.

The Contribution of SMEs (Small to Medium sized
Enterprises)

Since SMEs represent 99.8 per cent of the number of
enterprises in the EU, two thirds of turnover and business employment, they feature
heavily in Europe's innovation programme.

Of the 10 million new jobs created in the USA from 1993-6, a
third were created by small and medium-sized high technology businesses

78 per cent of income in the computer industry comes from
products less than two years old

The European biotechnology market is expected to grow from
ECU 10 billion in 1996 to over ECU 80 billion by the year 2000

Two thirds of the 170,000 SMEs that produce inventions do
not apply for patents.

Only 10 per cent of SMEs commit enough time to launch new
products, and of those only one in four are a commercial success.

Bottom Line - SMEs are important, but need to do better at
innovation.

Our Analysis

Small Enterprises are too broad a group for these broad
statements. Research at Durham University Business School has found that "small"
is a state of mind, rather than number of employees (an SME is defined as less than 500
employees, still quite a sizeable company). There are tremendous differences between those
that are just small, and those that are small, yet have global perspectives, with growth
and wealth creating motivations.

A. Three Areas For Action

'Innovation requires first and foremost, a state of mind
combining creativity, entrepreneurship, willingness to take calculated risks and an
acceptance of social, geographical or professional mobility'

While the Commission notes that action for innovation
"is in the first instance the responsibility of citizens, of industry and of
national, regional and local authorities", it identifies three central areas for
action:

To foster an innovation culture

To establish a framework conducive for innovation

To better articulate research and innovation.

1. Fostering a Genuine Innovation Culture - Actions
Proposed:

Education and training - courses and teaching methods should
"stimulate creativity and a spirit of enterprise" from an early age

Easier mobility for researchers and engineers - to help with
technology transfer projects

Demonstrate effective approaches to innovation - by
involving citizens, industry in the debate on technological choices

Stimulate innovation in the public sector and government -
through training or awareness schemes.

Benchmarking activities are proposed, along the lines of
UK's R&D 'scorecard', and company visits as part of the TOP schemes in Germany and
Spain. It calls on member states to "support training schemes for innovation
management, especially through the development of European networks of business schools
and their co-operation with industry and SME support bodies."

Our Analysis

The language is industrial age and based on old models of
innovation e.g. 'technology transfer', 'benchmarking', 'best practices'. They are
yesterdays "prescriptions for mediocrity". Truly innovative companies set the
standards that others benchmark and follow. Innovators regard benchmarking as lost
opportunity time. It is therefore not clear whether the following - necessary for
breakthrough innovation - will be achieved:

developing common language through dialogue

nurturing Communities of Knowledge Practice

a shift of emphasis from training to learning

developing cross-sector, cross boundary processes

enhancing the value of collaboration (vs. competition).

2. Setting up a Legal, Regulatory and Financial
Framework Conducive to Innovation

"The excessive complexity of administrative procedures
costs European industry between 180 and 230 billion ECU annually, thereby damaging its
competitiveness".

The legal and regulatory framework needs to be adapted and
simplified. Areas for improvement include:

Simplification of European patent system: more accessible,
efficient and less expensive; at the moment there are three patent systems - national,
European and Community

Business start-up and innovation support must be simplified:
the formalities and delays to start a business must be reduced

Innovation financing must be made easier (a result has been
the creation of NASDAQ, a European version of NASDAQ)

Our Analysis

Welcome as these actions are, the framework is far too
narrow. There are some good ideas, especially around financing. The 'framework' must go
much further:

incubation and business development facilities for SMEs are
needed (c.f. the Danish networking model)

incentives must be found for the system as a whole and to
motivate individuals

closer relationships need to be developed between industrial
and societal levels.

While we accept that some of these may be covered in other
programmes, only a cohesive integrated framework can help Europe break through the
innovation paradox.

3. Gearing Research more Closely to Innovation

"In knowledge-based economies, the efficient systems
are the ones which combine the ability to produce knowledge, the mechanisms for
disseminating it as widely as possible and the aptitude of individuals, companies and
organizations concerned to absorb and use it."

More Intense co-operation between public, university and
industrial research e.g. allow university researchers time to develop companies.

Strengthen the capacity of SMEs for absorbing new
technologies and know-how

In each of these the Commission sees its role as
facilitating information exchange, co-ordination and improving links between various
activities.

At the European level, there is a single horizontal
framework for integrating innovation and SMEs within the Fifth Framework programme.
Encouragement will be given to making preparation during the research phase to
exploitation, and to make the programme more accessible to SMEs. Other Community
instruments "will be mobilized to support innovation" e.g. use of Structural
Funds for innovation; creating better links to bodies outside the EU "where two
thirds of world innovations and scientific discoveries are made" and where "most
expanding markets are to be found".

Our Analysis

R&D alone is insufficient for innovation. Foresight and
similar programmes sound too much like formalized planning rather than doing and
experimenting. David Skyrme's submission to consultation on the UK programme suggests that
it perpetuates the old industry boundaries and actors, not the new cross sector
opportunities and entrepreneurs. These actions are a start, but do they go far enough in:

recognizing that innovation is more than just R&D; it
involves marketing, service development etc.

crossing sectors and also linking government, academia and
industry

encouraging entrepreneurship in R&D and innovation

building on distinctiveness: Europe's roots, heritage,
knowledge of hindsight

There are some gems in the various action lines, but they
get lost in the overall picture that is painted.

B. Reactions To Green Paper

Having distributed over 40,000 copies of the 1995 Green
Paper, opinions were widely sought. This was done through conferences (which over 5,000
delegates attended) and detailed submissions (over 300 were received), and official
responses from member states, as well as Norway and Hungary.

Generally respondents welcomed the initiative and
especially ways of strengthening links between research and industry. There was a
difference of opinion as to what extent the EU should fund research that goes beyond the
pre-competitive stage. There was unanimous agreement that the administration of European
level funding programmes needs to simplified and streamlined and more user friendly
towards SMEs. (In 1996 the average length of time taken from proposal to project start was
nearly one year).

Some specific comments that we picked out as pertinent on
the different action lines (source of comments in brackets) were:

Research Oriented to Innovation

"Technology watch and technology foresight initiatives
create jobs in only in the science of forecasting and not in businesses" (UEAPME)

"The centralized model for technology foresight is
risky" (Oslo)

"Europe does not need more research. It needs
correctly applied, effective and high-quality research" (Birmingham conference)

"Co-operation between less-developed and
more-developed regions must be promoted" (Madrid)

Some manufacturers expressed reservations about the EU
co-coordinating industrial rather, feeling that the efforts would be better spent on
strengthening the cohesion of European Community programmes.

Finance

There was a strong move in favour of a NASDAQ-type European
market for the trading of shares in young growth oriented companies.

Legal and Regulatory Environment

There were many comments on Intellectual Property Rights
(IPR), most notably patents. Access to information on patents was seen as crucial. Sweden
suggested public funding to support an insurance system to help companies defend their
IPR.

National Government Reactions

Comparisons of national reactions were interesting through
their emphasis and variety. The German government highlighted its own national programmes
e.g. Delphi technological foresight initiative; INST (Innovationsstimulierung der
Deutschen Wirtschaft durch wissenschaftlich-technische Information).

While most welcomed the broad range of initiative,
especially the coordinating activities of the Commission, some had a very narrow view e.g.
the Italian government was primarily concerned with protection of EU intellectual
property. Some smaller countries, like Austria and Finland provided sizeable and helpful
comments. However, there were several critical comments e.g.

"The Green Paper limits itself to addressing the main
obstacle and challenges to innovation without a proper framework proposal to foster
innovation in the EU" (Spain)

Three that we felt particularly pertinent were:

"The formulation of the 'European paradox' involves a
linear and out-of-date vision of the phenomenon of innovation..... Portugal considers that
the Green Paper tackles, only in a limited way, the problem of links between innovation,
growth and employment. It is not the technologies that which can solve the problems of
organizations, or which create new opportunities for the companies, but their innovative
application, including the new forms of social and organizational innovation."
(Portugal).

"The Swedish Government was concerned at the very
technical slant to innovation that was presented and stresses that innovation influences
every aspect of life.... there are societal needs to be addressed which will also require
very innovative approaches, for example the increasing numbers of elderly people in the
population. Organizational innovations were also considered lacking". (Sweden)

"Innovation in the service industry should be
encouraged." (Finland)

Our Analysis

It should be remembered that national comments are often
made by government officials, without a detailed consultation exercise. Hence they may not
reflect the general views of business in their country. Also, many governments do not have
a strong innovation policy, and if they do, it is generally based on technology transfer,
information services and competition, and not on innovation, knowledge and collaboration.

C. Current Status

In introducing the 1998 booklet 'Innovation for Growth and
Employment', Edith Cresson says:

"By adopting this report at my initiative, The
Commission intends to put down a prominent marker to show that it is fully taking into
account the importance of the link between innovation, growth and employment, based
notably on the conclusions of the European Councils of Amsterdam and Luxembourg".

She notes that The Innovation Action Plan is under way.
Initial actions have been taken in protecting intellectual property rights, establishing
finances, and administrative simplification. However, more needs to be done to increase
the plan's impact by mobilizing the member states and to put more emphasis on developing
an innovative culture. The report highlights six areas of action:

Protection of Intellectual Property Rights

Financing Innovation - most notably EASDAQ

Administrative Simplification

Education and Training - including the innovation process

Gearing Research to Innovation

Strengthened Co-ordination e.g. between RTD and Innovation
policies.

In the area of IPR, a help desk is being established. It is
to help SMEs find sources of information on patents, and gain access to best practice. In
finance, EASDAQ, backed by 60 financial institutions listed its first companies in
November 1996 and has already helped the initial public offering of companies like
Autonomy (producers of intelligent search agents). Other initiatives are I-TEC (Innovation
and Technology Equity Capital) and LIFT (Innovation Financing Help Desk). One proposal to
simplify administration is to promote EEIGs (European Economic Interest Groupings) - the
only legal form of enterprise at European level.

Initiatives in education and training include CAMPUS-VOICE
(a multimedia Internet platform for education and training services), Train-Re-Tech
(Training in Research and Technology Transfer in Businesses), mobility between
universities, research institutes and industry and From-Inno-Tech, a network to promote
training for innovation. In gearing research to innovation, Framework V plans call for
'Innovation cells' that would promote innovation in each of its four thematic programmes:

Improving the quality of life and the management of living
resources

Creating a user-friendly information society

Promoting competitive and sustainable growth

Preserving the eco-system.

Further emphasis is placed on demonstrator projects,
strengthened technology transfer and collaboration at the Commission's own Joint Research
Centre (which is actually seven institutes in five member states) including incubators,
virtual technology parks and a technology transfer fund.

Our Analysis

There are some good specific plans, and the closer
involvement between sectors and between technologists and users are welcomed. However, we
reiterate that the focus needs a visible shift.